U.S. economic data right now is as 'good as it gets', Goldman Sachs says

The recent run of U.S. economic data is likely as good as it gets, according to strategists at Goldman Sachs.

Writing in a note to clients on Thursday about the firm’s theme that we’re seeing “peak sentiment” in the U.S. economy, strategists James Weldon and Charles Himmelberg note that while sentiment remains near post-election highs, the risk that this trend ends is rising.

“Last year we cautioned that the downside risks to ‘peak sentiment’ were riding on macro data and policy,” Weldon and Himmelberg write.

A fan wearing the American flag cheers during the men’s curling semi-final match between United States and Canada at the 2018 Winter Olympics in Gangneung, South Korea, Thursday, Feb. 22, 2018. United States won. (AP Photo/Aaron Favila)

“One year on, sentiment is higher, but now the macro data are likely ‘as good as it gets’ and the administration has already passed an unprecedented amount of late-cycle fiscal stimulus. In our base case, we would expect this sentiment plateau to extend further, but the risks to investor sentiment appear more skewed to the downside than they were a year ago.”

A divergence between the hopes and realities of economic growth, in other words, will not hold over the long term.

Economic sentiment has accelerated away from changes in hard data. And Goldman isn’t sure the hard data will get much better. (Source: Goldman Sachs)

Back in November 2017, Goldman’s economics team said that 2018 was likely to be “as good as it gets” for the global economy as output gaps — or the perceived gap between actual and potential growth — closed while inflation, and in turn monetary policy, would not yet constrain economic growth.

Recent economic data have largely confirmed this view. Strong economic data has not yet been accompanied by dramatically rising inflation or tighter monetary policy. Higher interest rates in the U.S., however, indicate markets are anticipating both of these will happen.

Economic sentiment as gauged by readings like consumer confidence and small business confidence has accelerated to even higher levels after plateauing following a post-election jump. This latest push higher in sentiment also came alongside hard data series like industrial production, retail sales, and employment strengthening in the final months of 2017. (Retail sales, however, had a rough start to 2018.)

Strong data, favorable policy, and self-reinforcing sentiment readings on economic conditions have all combined to create a new, higher plateau for sentiment-based views on the economy.

And Goldman notes that multi-year plateaus in economic sentiment are not unusual and often result in a highly resilient economic expansion. The way that U.S. consumers appear to have shaken off the latest stock market drop is a case in point.

But as Goldman sees it, this trend is more susceptible to reversing than it was a year ago. Until then, however, everything is pretty great.

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Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland